Smoother Path to Outperformance with Multi-Factor Smart Beta Investing

Research Affiliates

Chris Brightman

Research

10 Pages

Research Affiliates examines how combining multiple smart beta factors can potentially improve returns while reducing tracking error and drawdowns. The paper argues only six equity factors appear genuinely robust while dynamic rebalancing lifted historical value add to 3.16% versus 2.19% for standalone strategies.

Key Takeaways

Factor Diversification Benefits: Combining six factors cut tracking error from 7.10% to as low as 3.41% while improving information ratios from 0.30 to 0.72.
Dynamic Rebalancing Edge: Dynamic rebalancing increased annualized value add to 3.16% from 2.45% under systematic rebalancing and 2.19% across individual factor strategies.
Questionable Factor Proliferation: The authors note academics documented more than 300 factors, yet the paper concludes only six showed durable out of sample robustness.
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